Market Power, Multimarket Contact and Pricing: Some Evidence from the US Automobile Market

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08118.pdf Non-Technical SummaryMultimarket contact is perceived to be one of those factors, which can facilitate and sustain implicit collusion. This multimarket contact effect has got relatively little attention in the previous literature, although the theoretical and empirical discussion has been revived in the 1990s after Bernheim and Whinston (1990) seminal work. In this paper the authors state that the multimarket contact may lessen the degree of the competition between the rivals, as the multiple competitors are more likely to recognize their mutual dependence, and to sustain collusion across the range of markets, in which they meet. The existing empirical studies, which are mostly done for airlines and banking industry, have failed to give conclusive evidence about the existence, sign and significance of the multimarket contact effect on collusion.The present paper attempts to develop new approaches to study the interdependence of firm behaviour across markets, especially in the context of differentiated products industries. In particular, the paper looks at whether the multimarket contact facilitates collusive (cooperative) arrangements, or reduces firm competition intensity.The multimarket contact effects are studied within a structural oligopoly model for differentiated products for the US automobile market. The automobile industry is characterized by extensive multimarket contact within the geographical and product market context where different firms may have different "spheres of influence". The results of the paper lends some support to the fact that multimarket contact influences competition in the automobile markets and increases the firms' strategic interdependence. Das Wichtigste in KürzeDer Multi-Markt-Kontakt (‚multimarket contact') ist eines der Faktoren, der zu impliziten Kollusion führen könnte. Dieser Multi-Markt-Kontakt-Effekt wurde in der früheren Literatur relativ wenig untersucht, obwohl die theoretische und empirische Diskussion nach der grundlegenden Studie von Bernheim und Whinston (1990) Nina Leheyda* Abstract: Multimarket contact is perceived to be one of those factors, which can facilitate and sustain implicit collusive (cooperative) arrangements. This paper attempts to develop new approaches to study the interdependence of firm behaviour across markets, especially in the context of differentiated products industries. I analyse the principl...

Private Incentives to Innovate: Interplay of New Products and Brand-Name Reputation

“…The low price coefficient, of a similar magnitude, has been found by . I have found the price coefficient of a similar magnitude in my panel data estimations of the one-level nested logit for the US automobile market (Leheyda, 2007). The magnitude may be, however, not so surprising.…”

Geographical and Multi-Product Linkages of Markets: Impact on Firm Equilibrium Interactions (Some Evidence from the European Car Market)

“…The literature on multimarket contact theory has been more extensively discussed in the paper on the multimarket contact effects in the US light vehicles market (Leheyda, 2007a). In this section I would like to highlight some empirical studies that are more relevant for this study and have not been discussed in detail in the paper earlier.…”

“…On the demand side, the two-way error components model is estimated to account for the panel nature of the data similar to Brenkers and Verboven (2006a). The structure of the error term is as follows: The instruments that I have used in the demand estimation for prices and market shares are standard in the literature (for a more detailed discussion of the instruments see Leheyda (2007a)). Formally, | 0…”

“…In Leheyda (2007a) I could find some evidence about the possible existence of the multimarket contact effects on the firm behaviour in the US light vehicles market. However, some additional evidence could have been worthwhile to get to argue firmly about the relevance of these effects for the automobile markets.…”

Multimarket Contact in Italian Retail Banking: Competition and Welfare

“…Parker and Röller (1997) in mobile phones, Leheyda (2008) in the auto industry). Davis and Huse (2010) and Sabbatini (2006) adopt a di¤erent approach to evaluate coordination in merger simulations.…”